Flash Trading | More Funny Business on Wall Street?

Taming the oily Wall Street beast

(Photo: donkelphant.com)

Ask any investor what the last thing Wall Street needs is these days. There will be some variety in the answers you receive, but most anyone will agree that a stock market crash (always a bad thing) would be horrible right now. Particularly since America is barely beginning to claw its way back up out of the recession.

What could cause a stock market crash? There are a number of complicated ways to answer that, but for the purposes of this article, let’s examine something called flash trading, which the SEC is seriously considering banning. Not just because it gives certain high-powered investors a possible advantage, but because the same technology that makes flash trading (also known as high frequency trading) possible could create a feedback loop that grinds the market to a halt. At that point, payday loans and no fax payday loans won’t be enough to put Humpty Dumpty back together again.

We don’t need more shenanigans

Sarah Lynch reports for The Wall Street Journal that the Securities and Exchange Commission is considering stopping the flash trading practice that critics claim “gives an unfair advantage to some traders by giving them an early look at buy and sell orders.”

How does this happen? Well, apparently flash trading gives people with the technology a glimpse at stock trades before they reach exchanges for filing. From a technological standpoint, it is collocation of the servers flash traders use that makes the whole process much faster. They can avoid the data latency that other traders would encounter. In a nutshell, this technology gives flash traders a window in which to act that other traders simply don’t have, and while it’s currently legal, the SEC would perhaps like to change that. For more detailed info on this practice, check out this article at Wall Street and Tech.

Cut it out, right now

SEC Chair Mary Schapiro has decreed that SEC staff “explore an approach that can be quickly implemented to eliminate the inequity that results from flash orders.” The majority of U.S. stock exchanges have said they would not object to curbing the flash trading practice.

“We salute the SEC for moving forward with this ban that will restore integrity to the markets. The agency is absolutely making the right call by stepping up and ending this unfair practice,” Sen. Charles Schumer said. “It is also important to make sure flash orders aren’t just the tip of an iceberg lurking in the dark reaches of the market.”

“The dark reaches?”

Yes, I did say that there’s more to this than just giving some investors an unfair advantage with flash trading. Joe Weisenthal of BusinessInsider.com writes that

Of course, there are a lot of folks who rail against financial innovation and they have what seems like a good reason: it can cause epic blowups. We’re still not convinced that this last crisis was actually caused by innovations, but it’s an acceptable argument, and in the world of HFT (high-frequency trading), we could imagine, possibly, some computer going buck wild and screwing up the whole market, creating some crash-making feedback loop.

That would be a bad. Very bad.

Here’s hoping that the SEC gets this off the boards quickly. If flash trading and other HFT elements present the risk Weisenthal suggests, America hasn’t got time for the pain. Not anymore. We’re recovering. We use payday loans and no fax payday loans on occasion when needed, but we don’t want to have to face the complete collapse we feared would come from our current recession.